Overdraft Fee Monster Eats Social Security Income, Too

B of A’s Overdraft Fees Victimize Long-Time Customer

This should be considered a deadly weapon, in light of banks' runaway abuse of overdraft fee policies. (Photo: flickr.com)

Overdraft fees across the board have attracted the interest of Congress lately. Many have said that the way in which overdraft fees are assessed by banks and credit unions is predatory and dishonest. Charging the same high fee for each infraction – even if is for 1 cent – and then charging an additional fee for each day a customer’s account is overdrawn makes it nearly impossible for already cash-strapped consumers to raise their heads above water.

But Overdraft Fees Came Calling

First, Bank of America accidentally deposited $1,799.83 in Miller’s account. They realized the error and reversed the credit, but not until Miller had made some charges. B of A also failed to give Miller notice of the deduction. The result was that his balance dipped below zero. Overdraft fees followed, which depleted a social security payment. For reference, Bank of America’s NSF fees at that time ranged from $14 to $32 per transaction. Up to five NSF fees could be processed against a checking account per day, with a maximum of $160 in overdraft fees allowed.

Miller pointed out that depleting his social security payment made it impossible for him to pay his rent or living expenses. Yet Bank of America told their long-time customer that he’d have to repay the part of the erroneous credit that he’d spent, but that he “could open a separate checking account for his SSI deposits that would not be used for repayment.” Miller did this, but a few months later the bank twice dipped into this new account to cover the overdraft fees. Both times Miller complained and the money was credited back to him.

And the Same Thing Happened Again

Although he did so infrequently, Miller occasionally overdrew his checking account. Each time, Bank of America hit him with overdraft fees that automatically deducted from his social security income. Bank employees who’d previously assured Miller that no deductions could be made from social security deposits without authorization now claimed that such funds received no “special treatment.”

Interestingly, during trial, a Bank of America executive responsible for checking products at Miller’s branch testified that Bank of America “could develop the capability to identify accounts into which public benefit funds are directly deposited, and could bypass charging NSF fees to those accounts.”

Why Didn’t Bank of America Take the Customer-Friendly Route with Overdraft Fees?

The same executive testified that “in order to prohibit certain account holders from overdrawing their accounts (which would eliminate the Bank’s need to recoup overdrafts or charge NSF fees), the Bank would have to ‘bounce’ more checks, withhold check deposits for the maximum allowable period of four days instead of one or two days before the Bank would make the funds available for withdrawal, eliminate point-of-sale purchases (but not personal identification number (PIN) transactions), and restrict automated teller machine (ATM) withdrawals from non-Bank ATMs.” The executive also stated that larger transactions would be processed before small – regardless of when the transactions occurred – because Bank of America felt larger transactions were “more important.”

More Important for Whom?

Any consumer who has felt the barbed sting of overdraft fees knows that the reordering of transactions is a way that banks stack the deck against consumers. Bank of America claimed in the Miller case that “the Bank’s practice of processing larger transactions before smaller ones results in the same total amount being overdrawn from a particular account.” Yes, but as Mr. Miller’s team clarified, doing so “increases the number and amount of NSF fees imposed.”

Nearly $300 Million at Stake in Overdraft Fees Alone

The California trial court found that fraud, negligent misrepresentation, CLRA, UCL, and false advertising claims were all viable issues that could be tried. A class was even certified that included “[a]ll California residents who have, have had or will have, at any time after August 13, 1994, a checking or savings deposit account with Bank of America into which payments of Social Security benefits or other public benefits are or have been directly deposited by the government or its agent.”

By the numbers, Bank of America had 1,079,414 such accounts in 2003. They received more than $800 million in government benefits via direct deposit. From January 1994 to May 2003, Bank of America took “at least $284,211,273 in NSF and other overdraft fees from accounts containing Social Security direct deposits.”

What Did the Jury Find in the Miller Case?

The jury found that Bank of America violated the CLRA by “falsely represent[ing] that it ha[d] the right to use Social Security funds from direct deposit accounts that receive government benefits including Social Security funds to pay overdrafts, insufficient fund[s] fees, . . . and money claims it has against class members.” Thus, the jury awarded $75,077,836 in compensatory damages for the class action. Each member also received $1,000 in statutory damages. Finally, Miller received $275,000 for emotional distress.

However, the Court of Appeal later reversed the trial court’s judgment, holding that Kruger did not get started. This is apparently still under review at this time.

What is the Kruger Argument?

Essentially, Kruger stated that a bank “may not exercise its right of setoff against deposits which, derived from unemployment and disability benefits, are protected from the claims of creditors.” But the Appeals Court found that the 1974 Kruger ruling “only applied to cases in which government payments were redirected to pay debts outside the bank.” Overdraft fees, by that logic, are internal debts.

The Consumer Loses Again

Runaway overdraft fees continue to plague consumers who can ill afford them. This is not to say that consumers should not be responsible for their expenditures, but in the case of Miller, I would argue extenuating circumstances. Until this is settled in California court – and until Congress forces banks to curtail abusive overdraft fee practices – the old phrase “buyer beware” still applies. At least there’s no deception with payday loans…